Pharaohs GC, Inc. v. United States Small Business Administration
990 F.3d 217
2d Cir.2021Background
- In March 2020 Congress created the Paycheck Protection Program (PPP) under the CARES Act to authorize SBA-guaranteed loans to small businesses; PPP borrowing and forgiveness were administered under SBA §7(a) authority and interim final rules.
- SBA’s interim rules incorporated longstanding §7(a) categorical ineligibilities, including a regulation excluding businesses that “present live performances of a prurient sexual nature.”
- Pharaohs GC, Inc., a Buffalo-area gentlemen’s club featuring nude dancing, applied for a PPP loan; its lender informed it the application would be rejected under the prurience exclusion, and SBA reserved the requested funds pending litigation.
- Pharaohs sued, seeking a preliminary injunction directing the SBA to process its PPP loan application, alleging (1) the exclusion exceeded the Administrator’s CARES Act authority (APA) and (2) the exclusion violated First and Fifth Amendment rights.
- The district court denied the preliminary injunction for failure to show a substantial likelihood of success on the merits; the Second Circuit affirmed, holding Pharaohs unlikely to prevail on statutory or constitutional claims.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether SBA exceeded CARES Act authority by excluding adult-entertainment venues (APA) | Pharaohs: subparagraph D’s “any business concern … shall be eligible” makes all businesses with ≤500 employees eligible; SBA exceeded statutory authority by importing §7(a) exclusions. | SBA: CARES Act expressly ties PPP to §7(a) “terms, conditions, and processes,” and subparagraph D must be read in that context; Administrator has discretion to apply existing §7(a) eligibility rules. | Court: Held CARES Act unambiguously permits SBA to incorporate §7(a) terms; even if ambiguous, SBA’s interpretation is reasonable—Pharaohs unlikely to succeed. |
| Whether exclusion is a forbidden regulation of protected expression (First Amendment) | Pharaohs: exclusion impermissibly regulates speech by denying subsidy to expressive conduct (nude dancing). | SBA: Exclusion is a subsidy condition (program eligibility), not direct regulation of speech; government can define scope of subsidy. | Court: Applied subsidy precedent; declined to apply strict scrutiny—Pharaohs failed to show the condition improperly leverages funding to regulate speech. |
| Whether the exclusion fails rational-basis / equal protection review | Pharaohs: the rule targets disfavored expression and lacks a rational relation to legitimate aims. | SBA: Excluding categories of businesses from limited public funds is rationally related to legitimate government interests (prioritizing finite resources; addressing secondary effects). | Court: Applied rational-basis review for selective subsidy; Pharaohs failed to negate conceivable legitimate interests—unlikely to succeed. |
| Whether exclusion constitutes viewpoint discrimination | Pharaohs: exclusion targets viewpoint implicit in nude dancing (pro-sex/sexual desire). | SBA: “Prurient” is a content/lasciviousness distinction, not a viewpoint; the rule targets content. | Court: Held prurience is content-based, not viewpoint; Pharaohs unlikely to prevail. |
Key Cases Cited
- Winter v. Natural Res. Def. Council, Inc., 555 U.S. 7 (preliminary injunction standard)
- Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837 (agency statutory-interpretation framework)
- Kisor v. Wilkie, 139 S. Ct. 2400 (deference requires exhaustion of traditional interpretive tools)
- United States v. Mead Corp., 533 U.S. 218 (administrative rules carrying force of law can trigger Chevron)
- Rust v. Sullivan, 500 U.S. 173 (government may define scope of subsidy program)
- Regan v. Taxation With Representation of Washington, 461 U.S. 540 (selective subsidy is subject to rational-basis review)
- City of Renton v. Playtime Theaters, Inc., 475 U.S. 41 (legitimate secondary-effects rationale for regulating adult entertainment)
- Paris Adult Theater I v. Slaton, 413 U.S. 49 (government interest in curbing commercial exploitation of sex)
- General Media Commc’ns, Inc. v. Cohen, 131 F.3d 273 (2d Cir.) (lasciviousness/prurience as content-based distinction)
- Tom Doherty Assocs., Inc. v. Saban Entm’t, Inc., 60 F.3d 27 (2d Cir.) (heightened showing required for mandatory preliminary injunction)